The opportunities in global markets for highly selective investors

The reopening trade in the short-term and accelerated structural trends in the long-term are presenting compelling opportunities in global markets. However, we believe investors must be highly selective in their exposure to themes, sectors and companies, while never losing sight of valuation.

The re-opening trade

The ongoing global vaccination campaign, together with unprecedented fiscal and monetary stimulus, have driven a strong recovery in economic growth since the depths of the pandemic. We expect stocks in specific sectors to continue to benefit from the re-opening tailwinds through FY2022.

Select investment opportunities can be found in companies exposed to a recovery in the travel sector. The travel sector was devastated by the pandemic, with companies experiencing significant and swift declines in revenue and patronage. Certain businesses have used the pandemic to focus on improving their operations and efficiency and look set to emerge in a more competitive position. Buoyed by a consumer base that is increasingly digital-first with pent-up demand for holidaying and business travel, we think companies particularly in the online travel bookings space are well placed for the re-opening trade, as are the digital payment providers with exposure to an upswing in cross-border transactions.

Companies exposed to growing infrastructure spend in countries like the US are also well placed to benefit as economies re-open. Enormous government stimulus packages have been announced. Ambitious renewable energy plans are in place. With decades of under-investment in transmission and distribution infrastructure, which is the backbone of the electric power system, major investment has begun and will continue. Specific investment opportunities can be found among the leading specialty infrastructure solutions providers who deliver equipment and services to aid the rollout of these projects.

The long-term lens

The extraordinary stimulatory environment we are currently in is temporary and will be wound back when economic growth becomes self-sustaining. As such, it is important to understand which opportunities are a result of supportive near-term financial conditions and which have longer-dated durability. We think certain structural trends that existed prior to the pandemic, and that have been accelerated because of it, present attractive longer-term opportunities in global markets.

An example of an enormous area of opportunity is health and wellness. COVID-19 shone a powerful light on the importance of investment in health and wellness, benefitting a sector that was already growing strongly before the pandemic. Within the space, we are seeing unprecedented levels of investment in medical research and healthcare innovation, driving progress in unlocking medical breakthroughs in areas such as cell and gene therapies and mRNA vaccines to prevent against infectious disease.

When looking for investable ideas in health and wellness, we are attracted to companies providing the medical equipment, tools and services to enable clinical trial research and drug development. We do not want to invest in businesses that rely on particular outcomes of clinical trials, instead choosing to invest in the companies providing the ‘picks and shovels’ to the medical industry.

Nutritional snacking is another example of a sector positioned for longer-term wins. Growing at approximately 8% a year over the past decade, we think this movement is still in its early days. The pandemic has deepened the obesity epidemic in the US and the nutritional snack category is still less than a tenth the size of the $100 billion traditional snack category. Increasingly, health considerations are the driver of food and beverage choices compared to taste and price.

Automation is an area which will continue advancing at pace in the long-term, with estimates that almost 50% of paid activities have the potential to be automated. Trade wars in recent years followed by COVID-19 have heightened awareness of security of supply chain issues. This is driving an increase in efforts to bring manufacturing back onshore, which is only cost effective when automation is involved. In the more immediate term, labour shortages in the US, exacerbated by difficulties getting employees receiving generous stimulus cheques back to work, are prompting employers to consider automation-based alternatives.

Lastly, the trend towards digitisation of payments is a theme that has significant longevity. Lockdowns and public health measures further accelerated a move away from cash payments to digital payment methods, boosting a sector which has experienced an upswing in demand in the last decade. According to a 2021 study from Visa, approximately 65% of consumers would prefer to use contactless payments as much as or more than they are currently and approximately 74% of small and micro businesses expect consumers to continue favouring this payment method after the COVID-19 vaccine is fully rolled out. We see significant momentum and opportunity for growth for digital payment providers through FY2022 and beyond.

Risks to consider

While the above opportunities are attractive, our view is that FY2022 will also require investors keep one eye to some key risks.

Companies of all sizes are facing supply chain disruptions and labour shortages as economies re-open and demand picks up, especially those that are reliant on global trade for their operations. As economic growth continues to recover and prices across many areas such as commodities, freight, building materials and labour rise, inflation has become a central debate topic, with a key question being whether it is transitory or not. The US Federal Reserve’s current position is that it is. We believe that regardless of inflationary outcome, it is prudent to invest in companies with high-quality management and attractive industry structures. During periods of inflation and product shortages, as we have seen recently, companies with these characteristics are better positioned to take market share and defend their margins.

The moves of central banks in advanced economies are front-and-centre when we think about risks for global equity markets. The Fed is now forecasting two interest rate rises before 2023 and is edging closer to tapering following its June meeting. The low interest rate environment has been especially supportive of long-duration assets, making potential interest rate rises an important inflection point. When financial conditions tighten, companies that were trading on extreme valuations that cannot be justified by their fundamentals will suffer. This is why we centre our process on finding undervalued growth companies around the world.

In summary

There are attractive opportunities in global markets in the immediate and long-term, but investors should position selectively moving into FY2022. Careful selection of companies trading on reasonable valuations and exposed to compelling themes should position investors well for the year ahead.

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